No name Coursework Example | Topics and Well Written Essays - 1250 words

No name - Coursework Example 2. (a) In a closed economy, IS curve is the interest rate at which the commodity market is at equilibrium at a given income level. This can be expressed algebraically as Y = C + I + G, where Y is the equilibrium income is the level of consumption, I is the level of investment and G is the government expenditure. It is worth to note that consumption is a function of income while investment is a function of interest rate and government expenditure is a function of tax. Using the equation given above, Y = C + I + G, but C = 100 + 0.4(Y – T) and when this is substituted into the IS equation we obtain Y = 100 + 0.4(Y – T) + I + G, since I = 1000 + 0.1Y – 20i which when replaced to the equation gives Y = 100 + 0.4(Y – T) + 1000 + 0.1Y – 20i + G,note that T= 300 finally the value of G = 100 which when replaced into the equation yield Y = 100 + 0.4(Y – 300) + 1000 + 0.1Y – 20i + 100. When this equation is simplified to give the IS curve we obt ain 0.5Y = 1080-20i and the IS curve will be represented by the equation below; Y = 2160 – 40i. ... IS-LM curve can be attained where there is equilibrium in the commodity market and money market. Using the IS and LM equations and combining them we obtain i= 50 and Y = 160.This means that equilibrium income Y=160 and equilibrium interest rate i=50. This can graphically be represented as: I M i 50 L S 160 Y (b) When the G increases by 100, the IS-LM curve equilibrium Y = 170 while the i=55 and this represents an upward shift in the IS curve as shown below: Io I1 i M 55 50 L S1 S0 160 170 Y (c) When the real money supply reduce by 200, the i=51 while Y=122 and this represents an upward shift in the LM curve as shown below. i I I M1 M0 51 50 L1 L0 S 122 160 Y (a)In an open economy, IS curve can be derived by equating Y= C+I+G+X-M, this can be represented as Y = 100+0.8(1-t)Y + 700-50i+900+700-0.2Y: In simple expression the IS curve will be Y=4000-83i. On the other hand the LM curve will be expressed algebraically as Money Demand equals Money Supply and using the data provided this wil l be 0.25Y – 62.5i = 500. Hence Y= 2000+ 250i (b) The equilibrium income and interest rate in this case will be calculated by equating IS to LM which will be 2000 + 250i =4000-83i and Y= 498 and i= 6. Hence the governments surplus budget will be (X)700- (IM)99 = 600. (c) The equilibrium income Y = 498 therefore, the government expenditure should be increased by 4602 (d)The change in balance of trade will be export less import which is 600 and this is also a government surplus. This employment is sustainable since there is an extra demand for labor to be absorbed in the export sector and this also means that the extra export creates more employment opportunity. (e) The full